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Getting Shaken Out Is Better Than Getting Blown Out: How I Think About Stop Losses

A man walks through a capital markets conference, illustrating the trading discipline of exiting quickly when a trade proves wrong.

I have been stopped out of trades that later turned around and ran. It is annoying. You watch the stock dip through your level, your stop executes, and then it recovers without you.

That can make a trader want to stop using stops altogether. I do not.

My view is simple: getting shaken out is better than getting blown out.

Before I buy, I want to know what would tell me the setup has failed. If I am buying near support, a clean break below it may be the answer. If I am buying a breakout, falling back through the new support area may tell me the move did not hold. The stop should connect to the thesis rather than being a random percentage I picked because it looked tidy.

Different stocks need different room. A volatile small cap may need more room than a slower large cap. Liquidity, volatility and the structure of the trade all matter.

Once I know the entry, target and stop, I can compare the upside and downside. I generally want the potential gain to be meaningfully larger than what I am prepared to lose. That still does not make the trade work; it makes the bet make more sense to me.

Stops are also useful because I do not want risk management to depend on whether I happen to be staring at the screen. News hits. Markets move. I may be in a meeting or training. Having a preplanned exit gives the trade some structure when I am not there.

Yes, shakeouts happen. If the stock recovers and gives me another good setup, I can buy it again. I would rather accept that inconvenience than build a process around the assumption that every breakdown is fake.

As a winner moves higher, I can also move the protective level higher. I am not trying to nail the exact top. I am trying to let a good move work while protecting more of it as the trade develops.

I do not need every trade to work. I need a process that keeps me in the game.

For the larger framework, read How I Think About Trading, Plan the Trade Before You Enter It, and You Can Always Buy It Back.

Continue exploring

This article is part of my Trading & Markets authority series. Continue with Capital Markets hub, Higher Highs & Higher Lows: How I Ride a Trend Until It Breaks, Why I Keep a Trading Journal and Why Buying Is Easy and Selling Is Hard.

This article is educational only and not investment advice. Trading involves risk.

Chad McMillan

Chad McMillan is a creative entrepreneur and strategic advisor with over 20 years of experience in and around the capital markets, focused on finding hidden potential in companies, ideas, markets and people, and advancing what they can become.